Default management by central counterparties: the importance of preparation – introductory remarks to the CFTC’s Market Risk Advisory Committee
David Bailey, Financial Market Infrastructure, Bank of England
Commodity Futures Trading Commission Market Risk Advisory Committee, Washington 17 November 2016
I would like to thank Committee Chair Bowen for inviting me to speak to the Committee today on the important topic of CCP Resilience. As supervisors of some of the biggest and most systemically important CCPs that serve global markets, the Bank of England and CFTC have a strong history of collaboration on market infrastructure and clearing related issues, on which today’s discussion can build.
The next evolution of CCP fire drills
I have listened with great interest to the previous panel discuss recommendations regarding CCP Default Management. Today I would like follow on from that discussion by focusing on one important element of CCPs’ resilience – the way in which CCPs test their default management preparations and procedures via default management ‘fire drills’.
We know from past experience that the default of a material clearing member is likely to be a stressful event for a CCP. Realistic fire drills therefore help maintain CCP and clearing member preparedness, and test the robustness of default management arrangements. Fire drills are exemplars of the importance of proper preparation in ensuring readiness for unlikely and potentially challenging events. Given that the default of a material clearing member is likely to be accompanied by a period of market stress, there is no scope for poor performance by CCPs in managing the default.
The full speech is available here.
